It has been a rocky road for Williams Companies (NYSE:WMB) and its master limited partnership, Williams Partners (NYSE: WPZ), over the past couple of months. Not only are investors anxious that Williams Companies' merger with Energy Transfer Equity (NYSE:ET) might fall through, but they are worried about a growing number of risks facing Williams Partners. Needless to say, they have a lot of questions that Williams needs to address when it reports earnings later this week.
1. Are there any changes to the plan?
Williams Companies' current plan is to merge with Energy Transfer Equity in a stock and cash deal. It's a transaction that Williams' board of directors announced just last month that it was unanimously committed to completing with Energy Transfer Equity's board reportedly just as committed to closing the deal.
Despite that commitment, the market isn't so sure the deal will close at the agreed-upon price because of the significant deterioration in the energy market as well as rising risks at Williams Partners. Because of these renewed concerns, investors want to know if the deal is still on track or if it's at risk of being derailed.
2. Has the impact of commodity prices worsened?
One of the specific concerns facing Williams Partners is the fact that it does have some exposure to commodity prices. We saw that last quarter when Williams Partners' adjusted EBITDA was affected by a $68 million hit from lower NGL margins after NGL prices remained at a 10-year low. That said, the company as able to overcome that impact, in fact adjusted EBITDA rose by $204 million, or 18%, year over year due primarily to higher fee-based revenue from new assets going into service. Still, investors are concerned about the impact from lower commodity prices and want to see that it isn't worsening.
3. Is Williams Companies seeing more shut-in volumes?
In addition to the impact lower commodity prices directly have on Williams margins, those prices are also impacting volumes because producers are shutting in uneconomic production. On Williams' third-quarter conference call, it noted that it had 900 million cubic feet per day of natural gas volumes shut-in in the Northeast. Given that commodity prices have continued to weaken, investors will want to know if the company is seeing any additional production shut-ins and if these shut-ins are having an impact on cash flow.
4. Is Williams concerned about its counterparty?
During the quarter, one of Williams Partners' key gathering and processing customers, Chesapeake Energy (OTC:CHKA.Q), made headlines due to its rapidly deteriorating financial condition. There were even recent reports that Chesapeake Energy was considering filing bankruptcy, though the company has said that's not the case. Still, these concerns weighed on Williams Partners because 20% of its gathering and processing revenue comes from Chesapeake Energy, which actually prompted its rating agency to downgrade its credit rating from BBB to BBB-, which is one notch above junk. In addition to that, Williams Companies' credit rating was downgraded from BBB- to BB+, which puts it below investment grade. Because of this growing counterparty risk, Williams needs to address it directly this quarter so investors know what, if any, impact a customer default will have on its operations.
5. How are Williams Partners' asset sales going?
Because of the overall concerns with credit in the industry, Williams Partners is planning to sell in excess of $1 billion in assets in order to pay for half of its 2016 capex plan. It plans to sell those assets through the first half of the year, which is going to be tough to do given how distressed the energy market is right now. Very few companies have access to the capital needed to acquire assets, which will likely prevent a bidding war. That said, investors will still want to see the company make progress on these sales.
One thing investors should keep an eye on is whether Energy Transfer Equity's namesake ML,P Energy Transfer Partners (NYSE: ETP), emerges as the buyer for any of these assets. While it too is capital-constrained, it does have some levers to pull, such as selling its stake in another affiliated MLP to raise cash. Either way, investors will want to be assured that Williams Partners can actually sell the assets it needs to sell at reasonable prices.
This is going to be an important report for Williams Companies and Williams Partners. The market is not only very concerned that the merger to Energy Transfer Equity will fall through, but is also apprehensive about the impact that the current downturn is having on Williams' operations. Needless to say, Williams needs to address these concerns head-on and show investors how it's addressing its growing list of risks.